Sociologist, journalist and author Alfred W. Jones is known for the floating of the first hedge fund in the year 1949. Jones believed that cost movements of a person’s asset could be envisioned as having a component because of the overall market and a component as a result of performance of the asset. To curb the effect of overall market volatility, he balanced his portfolio by purchasing assets whose price was expected to be greater than the market and selling small assets which were expected to be weaker than the market. As the objective is to 'hedge' (protect) that part of the risk as a result of overall market movements, this was termed as hedge fund.
- Hedge funds offer a great substitute to conventional methods of investment, and selecting the accurate fund is vital to maximizing your returns.
- As there are numerous types and models of hedge funds available out there, selecting the right one may appear to be a Herculean job.
- However, there are a few easy ways that will enable you narrow down your choices when it comes to your own hedge fund investment plan.
- For this you must understand the various kinds of investments, the caliber of the fund manager, different strategies that would be utilized to handle the fund, and lastly, the policies administering the fund.
What is Hedge Fund
A hedge fund can be termed as a special kind of investment which is available for a limited spectrum of investors that undertakes a higher range of investment along with trading than conventional long-only investment funds, and that, normally, pays a management to the investment manager. Every hedge fund has a unique investment strategy that is the mirror to the type of investments and the process of investment it undertakes. Hedge funds invest in a greater range of investments that includes shares, commodities and debt.
As the name depicts, hedge funds often seek to protect some of the risks associated with the investments facilitating variety of methods, most popularly short selling and derivatives.
In most of the jurisdictions hedge funds are available only to a limited category of professional or rich wealthy investors who satisfy certain criteria set by regulators, and are as a result exempted from many policies that govern common investment funds.
- The exempted regulations basically embody short selling, the use of leverage and derivatives, fee structures, and the conditions by which professionals can remove their capital from the fund.
- Loose regulation and the performance fees are the distinguishing features of hedge funds.
- The net asset of hedge funds may soar as high as billions of dollars, and the gross assets value of the fund is normally higher still due to leverage.
- Hedge funds outperform some specialty markets viz. trading in derivatives with high end result components and distressed debt.
Investment fund strategies often vary comprehensively. When talking to the manager of the fund, ensure that you discuss the kinds of hedging strategies and how they will be leveraged and in what circumstances they will be utilized. Some kinds of hedging methodologies are more risky compared to others, and you must keep in mind whether the risk can balance the potential gain when such strategies are facilitated. Most hedge funds provide with the information about the types of strategies that are legally authorized for use in the fund when you are in the process of taking decision. Compare the strategies of identical funds just to analyze the potential for return on your investment.
Make a Comparison Statement with Other Funds
- Prior to coming to a final decision to invest, ensure that you completely have an idea of the terms of your hedge fund as most funds have a lock-in time in which your funds will be inaccessible to you.
- Make sure that this is in line with other identical hedge funds.
- In addition, also keep in mind the terms pertaining to liquidity and payouts, along with the fees that you will be paying.
- In fact, your hedge fund manager must have invested a comprehensive amount in the fund also which will curb any risky investments that could result in a big loss.
Tips to Selecting the Right Fund
- Choosing the perfect hedge fund needs a great deal of planning, extensive research work and even more careful choices after making your initial evaluation.
- By choosing a hedge fund that goes well with investment vehicles that you can understand, and with a manager coupled with reliable experience, you can ensure that your investment stands the best chance of generating outstanding returns.
Estimates of industry size differ greatly due to the dearth of central statistics, the lack of a one definition of hedge funds and the fast development of the industry. As a common scale indicator, the industry may have handled around $2.5 trillion at its prime time in the summer of 2008. Recent studies say that hedge funds boast more than $2 trillion in AUM.